Expulsion Threats in Repeated Partnership Games

By Dilip Mookherjee
1983| Working Paper No. 702

This paper considers the incentive role of expulsion threats for deviants in repeated partnership games as an alternative to the use of trigger strategies (where a perceived deviation from an agreement is followed by the adoption of single period Nash equilibrium strategies for a number of periods by all players). Assuming that the partnership has costless access to a monitor which detects the identity of any deviator with some exogeneous probability, and that detected deviators are expelled and replaced by workers from an outside pool, we demonstrate equilibria where high-ability players never shirk, and low-ability players always shirk until detected and expelled. When team production is deterministic, this equilibrium is less preferable for non-free-riders than a trigger strategy equilibrium where no player shirks. However in the presence of small uncertainties in production, or when players are slightly irrational, all players may prefer the expulsion threat equilibrium with free-riders to trigger strategy equilibria, particularly when team size is large.